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China economic crisis a meltdown or slowdown?

Over the past two months, the Shanghai and Shenzhen stock exchanges in mainland China have left investors shaken. And the falls have raised questions about China’s economy, for long the world’s growth engine.

analysis Updated: Sep 17, 2015 10:55 IST
Sutirtho Patranobis
Sutirtho Patranobis
Hindustan Times
Chinese stock market,China economic crisis,Yuan
The surprise move meant to support flagging economic growth in China will further dent the competitiveness of Indian exports as Chinese goods become cheaper, aided by a weaker currency even as investors fret over underlying economic weaknesses (HT File Photo)

Zhang Qing, in his early 30s, thinks he has a reliable mantra to succeed in the Chinese stock market.

“Control your emotions. Take the stock market as just numbers. So, be more even-minded, less greedy and less anxious to gain more,” Zhang, who advises novices on investing, told me at a busy coffee shop not too far away from Beijing’s central business district.

If only the mantra were as easy to follow as it is to utter.

Thousands, like telecom employee Wang Jie and media professional Connie, two Beijing-based first-time investors in the stock market this year, have realised that there is only one way of not being hit by the stock market crash – keep a safe distance.

Over the past two months, the Shanghai and Shenzhen stock exchanges in mainland China have left investors shaken. And the falls have raised questions about China’s economy, for long the world’s growth engine.

Tuesday was typical of the recent turmoil. Only 59 stocks rose while 862 fell in Shanghai, and the benchmark fell more than 4% in the afternoon session. It was worse in Shenzhen, where losers outnumbered winners 1,330 to 65. More than 700 shares fell by the daily limit of 10%. Significantly, total turnover on the two bourses fell by nearly a third.

Starting from the middle of June, the total value of the A-shares market plunged by 15 trillion yuan in just three weeks. (That’s 150 trillion rupees, or bigger than the size of India’s economy).

The slide was prompted by weak Chinese data. A property downturn, industrial overcapacity, sluggish demand and weak exports held China's growth to 7% in the first half of the year. Now analysts expect capital market volatility, currency devaluation and slumping global commodity prices to further stall growth.

But the picture was brighter just a few months ago.

“Many of my friends had invested in the stock market. One friend had earned 300,000 yuan in six months. He persuaded me to put in money as well and invested my savings in a chemical company,” said Connie, who works for a media company.

That was in the beginning of July. Connie did not want to mention how much money she invested. But the she shrugged her head and said: “The good time lasted for only 10 days”.

Connie bought the shares for 13 yuan each; in the beginning of September, they were was selling for less than half.

Wang Jie, another young and first-time stock market investor from Beijing, was similarly convinced about investing money earlier this year.

“It was a bull market. I saw other people making money and thought I would get in and get out quickly. But ended up getting stuck,” Wang told HT.

The rot was spreading and regulatory authorities controlled by the Communist Party of China (CPC) were keeping a close watch. So were market watchers and financial journalists – and thereby hangs a very Chinese tale.

“Regulatory authorities and mainstream institutions realised that the stock market crash, if left unstopped, is bound to evolve into a full-blown financial crisis which could result in massive losses. The CSRC (China Securities Regulatory Commission) was unable to bail out the market on its own,” wrote Wang Xiaolu, a financial reporter with the respected business magazine, Caijing, wrote on July 20.

Wang, quoting unnamed sources, added: “Caijing learned that the central leadership, fearing that the stock market crash could expand, decided after urgent discussions to mobilise all resources to bail out the market. The CSRC announced July 5 that the People’s Bank of China would help provide liquidity support to China Securities Finance Corporation Limited (CSF) through various forms.”

His story essentially said “the securities regulator was studying plans for government funds to exit the market”.

About a month later, Wang was arrested for “fabricating and spreading fake information which had caused panic and disorder at (the) stock market, seriously undermined the market confidence and inflicted huge losses o n the country and investors”.

State broadcaster CCTV showed Wang as saying that he had sought to create a stir and catch the eyes of readers with his articles. “I should not have published a report that heavily and negatively affected the market at such a sensitive time... (I) caused such great losses to the country and to stock investors. I am deeply sorry,” he was quoted by Reuters as having said.

What probably angered the authorities was that the write-up could be read to indicate that the government was worried and lead to a self-fulfilling negative spiral.

The arrest of Wang or for that matter hundreds of others for allegedly spreading online rumours did not prevent the stock market’s descent.

But analysts point to silver linings.

Standard & Poor's (S&P) Asia-Pacific chief economist Paul Gruenwald recently said: “We are less uneasy about the state of the Chinese economy. The second-quarter gross domestic product (GDP) growth numbers were in line with the official annual growth target of 7%. This did not square with the doomsday view of the market following the steep stock market correction.”

The Singapore-based Straits Times said it probably not a meltdown for the Chinese economy but certainly a slowdown.

“Analysts are arguing that, to a large extent, the stock market rout was a correction as the market had already run up very substantially and that the market is now at a point where valuations are more closely based on fundamentals,” it said.

Trading on fundamentals, and not getting carried away: That’s a thought that chimes with Zhang Qing’s advice to newbie investors on controlling their emotions.

Read: To fix its economy, India must stop obsessing over China

China devalues Yuan : What it means for India

First Published: Sep 17, 2015 10:32 IST